Janet Yellen Explains Why Our Recovery Has Been So Weak

Ezra Klein points to an interesting speech last week from Janet Yellen, vice chair of the Federal Reserve. The question she’s addressing is why our recovery from the 2008 recession has been so anemic, and the answer comes in the form of three “tailwinds.” The first one is both the most important and the one that we have the greatest control over: fiscal stimulus.

History shows that fiscal policy often helps to support an economic recovery….For example, following the severe 1981-82 recession, discretionary fiscal policy contributed an average of about 1 percentage point per year to real GDP growth over the subsequent three years.

However, discretionary fiscal policy hasn’t been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as Exhibit 3 indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery….Negotiations continue over the extent of spending cuts now due to take effect beginning in March, and I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past.

The full speech is here. Ezra has a nice summary here. The bottom line is simple: we’re doing this to ourselves by actively implementing negative stimulus rather than positive stimulus. I still don’t know whether this is the result of ignorance or deliberate malice—maybe it’s both—but for the past four years we’ve been held hostage by ancient economic ideologies that should have died during the Great Depression. And we’re continuing to pay the price.


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